Foreign Investment in Pakistan hurt it’s Private Sector

A 13.25% interest rate has attracted foreign investment in securities but declined the demand of private sector credit which will contribute to economic slowdown and unemployment.

Pakistan

On Monday at the Pakistan Innovative Finance Forum by the Asian Development Bank, Finance Adviser Dr. Abdul Hafeez Shaikh announced $1 billion worth of government debt has been bought by foreign investors. An incredible inflow that equals the increase in official foreign exchange reserves for the fiscal year.

Analysts at Topline Securities are expecting inflows to reach a record $3 billion by the end of the current fiscal year in June 2020.

Debt auctions have been attracting foreign inflows in the form of short term Treasury bills (T-bills), with cut-off yields on 3, 6 and 12 month papers since July when interest rates hit a peak of 13.25% with the pace accelerating every month.

This growth has been attributed to State Bank of Pakistan keeping the interest rate unchanged at 13.25% for the second time in its bimonthly monetary policy announced on November 22nd.

Read more: $1 Billion of Foreign Investment in Pakistan: Positive sign for the Government?

Pakistan is one of the few countries in the world where interest rates have gone up, a strategic decision to curtail inflation and stabilize the economy. This foreign portfolio investment is expected to increase foreign exchange reserves, net international reserves in line with IMF’s requirement and develop a liquid foreign exchange market which induce confidence into foreign investors in Pakistan.

However, concerns regarding the high interest rate barring potential borrowers from getting funds from banks have been raised.

Pakistan is one of the few countries in the world where interest rates have gone up, a strategic decision to curtail inflation and stabilize the economy

“The declining demand of private sector credit is due to high cost of borrowing and slow economic activity which will subsequently affect economic growth and unemployment”, said Federation of Pakistan Chambers of Commerce and Industry President Daroo Khan Achakzai on Wednesday while addressing the declining private sector credit which has come down by RS 4.1 billion in the first four months of the current fiscal year.

He urged the central bank to decline the policy rate in order to increase the demand of private sector credit which will ultimately help in new industrialisation as a lower policy rate would incentivise savings which will raise investments and consequently economic growth.

Read more: Imran Khan: Pakistan’s Economy Heading in the Right Direction

Pakistan’s policy rate is considerably higher than other regional economies such as India at 5.15%, China at 4.35%, Malaysia at 3%, Sri Lanka at 8%, and Indonesia at 6.5%.

Achakzai argued that the high interest rates set to combat inflation will not achieve its purpose as the inflation is cost-push that cannot be controlled through contractionary monetary policy.

According to CEO Salman Haider Sheikh the policy rate is expected to decline following January under State Bank’s monetary policy however, the it would not drop further than 8-9%.

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